Tietmeyer warns on German inflation

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HANS TIETMEYER, the Bundesbank's vice-president, yesterday warned that German inflation remained at 'unacceptably high levels' over the long term. He also made a strong defence of the policy of relying on money-supply aggregates as guidelines for combating inflation.

Mr Tietmeyer's remarks in a speech followed similar warnings over the weekend by the Bundesbank's chief economist, Otmar Issing.

With German inflation set to hit an annual rate of 4.5 per cent this month, 'anyone who speaks of the inflationary threat not existing any more has apparently come to terms with a relatively high rate of price increases', Mr Tietmeyer said. 'The Bundesbank cannot take this view. It cannot capitulate in the face of inflation dangers, especially when times are difficult.'

In Bonn, the Federation of German Banks yesterday voiced support for the Bundesbank's reluctance to cut rates before it had a clear signal that the battle against inflation was being won.

Another member of the Bundesbank's decision-making central council, Helmut Hesse, said the timing of any decision to ease rates depended mainly on the size of wage settlements, government action to curb public spending and the value of the mark. 'I am against dashing ahead with cuts in key rates in the spirit of leading the economy,' he said.

Mr Tietmeyer said that the best service the Bundesbank could provide German financial markets was a determined policy of stability. 'I can assure you that we shall be sticking to this, even in difficult economic times,' he said.

He defended the M3 money- supply measure as 'the best, easily controllable stability goal'. As long as money supply growth stayed in line with increases in productivity, price stability could be assured.

Towards the end of last year M3 was rising at nearly 10 per cent, while productivity gains were about 2 per cent.

However, he added that the Bundesbank's obligation to carry out unlimited foreign exchange intervention to support rates within the European exchange rate mechanism tended 'to make money supply difficult, if not impossible, to control'.

The slight raising of the M3 growth corridor for 1993 to 4.5- 6.5 per cent was to cater for productivity potential in eastern Germany, Mr Tietmeyer said.